Royal Bank of Scotland Plc v Bannerman Johnstone Maclay
| Jurisdiction | Scotland |
| Judgment Date | 26 May 2005 |
| Date | 26 May 2005 |
| Docket Number | No 36 |
| Court | Court of Session (Inner House - Second Division) |
Court of Session Inner House Second Division
Lord Justice-Clerk (Gill), Lord Osborne, Lady Cosgrove
Reparation - Professional negligence - Lenders claiming damages for losses allegedly sustained as a result of negligent auditing of companies' accounts and fraud by employee of auditors seconded to company - Auditors directly involved in establishment and survival strategy of companies - Whether relevant averments of duty of care - Whether relevant averments of vicarious liability for acts of fraudulent employee
Practice - Pleadings - Relevancy - Lenders claiming damages for losses allegedly sustained as a result of negligent auditing of companies' accounts and fraud by employee of auditors seconded to company - Auditors directly involved in establishment and survival strategy of companies - Whether relevant averments of duty of care - Whether relevant averments of vicarious liability for acts of employee
A company was formed following a management buyout of an insolvent company. The defenders were directly involved in the establishment and financial projections of the company. An employee of the defenders was seconded to the company as financial controller. He was responsible for preparing management accounts and figures and documents for the audited accounts. The pursuers provided financial support to the company and its subsidiary in the form of overdrafts and loans. They also bought a shareholding in the company. They relied on the business plan, monthly management accounts and audited accounts of the company prepared by the defenders. The defenders made no disclaimer of liability to the pursuers in the accounts. Thereafter the pursuers appointed receivers to the company and its subsidiary, alleging that they had discovered material inaccuracies in the accounts which greatly overstated the value of the company's assets and its profits, and which resulted from a fraudulent scheme. The pursuers claimed damages from the defenders. They averred that the defenders had a close relationship with the company from the time of its formation and an intimate understanding of its relationship with the pursuers, and knew that the pursuers would rely on the audited accounts in making decisions about financial support. They averred that the defenders were responsible for the fraudulent acts of their employee during his secondment, and that these were carried out within the scope of his employment with the defenders. The defenders contended that the relationship of proximity required for a duty of care to arise could only exist if the pursuers averred that the defenders intended the pursuers to rely on the audited accounts, or made averments from which such an intention could be drawn, and the pursuers did not do so. They also contended that the pursuers could not claim damages for losses sustained through lending to the subsidiary, because they did not aver that the defenders had prepared accounts or mis-stated the position of the subsidiary. The defenders also contended that the employee in question was at the material time in the pro hac viceemployment of the company, and that in any event the pursuers had not relevantly pled that he was acting within the scope of his employment with them.
After debate the Lord Ordinary (Macfadyen) dismissed the case based on fraud and quoad ultra allowed proof before answer (2003 SC 125). The defenders reclaimed. The pursuers cross-appealed against the dismissal of the case based on fraud.
Held that: (1) for the proximity essential to the existence of a duty of care to be established in circumstances such as the present it is not necessary that the provider of information or advice have a positive intention, or purpose, that the third party recipient will rely on it (although such intention would support the existence of the necessary relation of proximity) and that the averments of the pursuers as to the involvement of the defenders with the company and its subsidiary entitled the pursuers to a proof before answer (paras 43-61); (2) the absence of a disclaimer may be a relevant circumstance pointing to an assumption of responsibility in respect of the information or advice tendered (para 63); (3) on the question of liability for losses sustained by the pursuers as a result of providing financial support to the subsidiary the pursuers were entitled to a proof before answer (para 65); (4) the Lord Ordinary erred in concluding from the pleadings that the employee to whom fraudulent acts were imputed was in the pro hac vice employment of the company; that question was sensitive to the facts and circumstances of the case, as was the question whether the employee acted outwith the scope of his employment (paras 66-68); and reclaiming motion refused and cross-appeal allowed.
The Royal Bank of Scotland plc raised an action of damages against Bannerman Johnstone Maclay, Chartered Accountants, on the grounds of professional negligence and fraud. On 23 July 2002 after debate the Lord Ordinary (Macfadyen) dismissed the case based on fraud and quoad ultra allowed proof before answer (2003 SC 125).
The defenders reclaimed. The pursuers cross-appealed against the dismissal of the case based on fraud.
The cause called before the Second Division, comprising the Lord Justice-Clerk (Gill), Lord Osborne and Lady Cosgrove, for a hearing on the summar roll, on 11 to 14, 18 and 19 November 2003 and 13 and 14 May 2004.
Cases referred to:
ADT Ltd v BDO Binder HamlynUNK [1996] BCC 808
Al Saudi Banque v Clark PixleyELRWLRUNK [1990] 1 Ch 313; [1990] 2 WLR 344; [1989] 3 All ER 361
BCCI (Overseas) Ltd v PriceWaterhouseCoopers (No 2)UNK[1998] BCC 617
Burgoine v Waltham Forest LBCUNK [1997] BCC 347
Caparo Industries plc v DickmanELRWLRUNK [1990] 2 AC 605; [1990] 2 WLR 358; [1990] 1 All ER 568
Electra Private Equity Partners v KPMG Peat MarwickUNKUNK[1999] Lloyd's LR PN 670; [2000] BCC 368; [2001] 1 BCLC 589
Esanda Finance Corp Ltd v Peat Marwick Hungerfords[2000] Lloyd's LR PN 684
Galoo Ltd v Bright Grahame MurrayWLRUNK [1994] 1 WLR 1360; [1995] 1 All ER 16
Haig v Bamford, Hangan, Wicken and GibsonWLR [1976] 3 WLR 331
Hedley Byrne & Co Ltd v Heller and Partners LtdELRWLRUNK[1964] AC 465; [1963] 3 WLR 101; [1963] 2 All ER 575
Henderson v Merrett Syndicates LtdELRWLRUNK [1995] 2 AC 145; [1994] 3 WLR 761; [1994] 3 All ER 506
Lister v Hesley HallUNKELRWLRUNK [2001] UKHL 22; [2002] 1 AC 215; [2000] 2 WLR 1311; [2001] 2 All ER 769
Lowe (R) Lippman Figdor & Frank v AGC (Advances) Ltd [1992] 2 VR 671
Marshall v William Sharp & Sons LtdUNK 1991 SLT 114; 1991 SCLR 104
Mersey Docks & Harbour Board v Coggins & Griffith (Liverpool) LtdELRUNK [1947] AC 1; [1946] 2 All ER 345
Miller v South of Scotland Electricity BoardSC 1958 SC (HL) 20; 1958 SLT 229
Morgan Crucible Co plc v Hill Samuel & Co LtdELRWLRUNK[1991] Ch 295; [1991] 2 WLR 655; [1991] 1 All ER 148
Royal Bank of Scotland v Bannerman Johnstone MaclaySC2003 SC 125; 2003 SLT 181
Scott Group Ltd v McFarlane [1978] 1 NZLR 553
Wickstead v Browne (1992) 30 NSWLR 1
Wilkie v Scottish Aviation LtdSC 1956 SC 198
At advising, on 26 May 2005-
Lord Justice-Clerk (Gill)-
[1] This is an action of reparation arising from the insolvencies of APC Ltd ('APC') and its subsidiary APC Civils Ltd ('APC Civils'). The pursuers were the bankers of both companies. The defenders were the auditors of APC.
[2] The pursuers claim damages for losses allegedly sustained by them in consequence of negligence on the part of the defenders in the auditing of APC and of fraud on the part of Michael McMahon ('McMahon') who, they allege, was one of the defenders' employees and was acting in the course of his employment with them at the material time.
[3] The Lord Ordinary heard a debate on the defenders' plea to relevancy. He dismissed the fraud case. Quoad ultra he allowed proof before answer. The defenders have reclaimed against the allowance of proof before answer. The pursuers have cross-appealed against the dismissal of the fraud case.
[4] In the reclaiming motion and in the cross-appeal some lesser issues have fallen away. There are now four main issues, namely (1) whether the pursuers have relevantly averred the existence of a duty of care on the part of the defenders; (2) the significance, if any, of the defenders' failure to issue a disclaimer of liability in respect of the audited accounts; (3) whether the pursuers have pled a relevant claim for damages for losses sustained through their lending to APC Civils, and (4) whether the pursuers have pled a relevant case of vicarious liability on the part of the defenders for the fraudulence of McMahon. Counsel have in all essentials renewed the submissions that they made to the Lord Ordinary. The Lord Ordinary has set them out at length (cf 2003 SC 125, paras 11-42; 59-71) and I need not rehearse them.
[5] The pursuers aver that APC was formed after a management buyout of Adam Bruce Plant Hire Ltd ('Adam Bruce'), which had become insolvent. APC assumed liability for about 1,900,000 owed by Adam Bruce to the pursuers. APC began to trade as plant hirers in December 1994 or in January 1995. The pursuers give both dates. APC Civils began to trade in September 1997. Its business was to carry out some of APC's contracts for motorway work.
[6] The pursuers aver that they were the principal bankers to APC and APC Civils and provided both companies with overdraft facilities. They gave APC a term loan of 1,500,000 and a small firm's loan of 100,000.
[7] On 24 September 1998 the pursuers appointed joint receivers to APC. On 28 September 1998 they appointed joint receivers to APC Civils. At the dates of the receiverships the overdrafts of APC and APC Civils were 8,255,146 and 3,530,820 respectively.
[8] The pursuers aver that they appointed the receivers because they discovered that the accounts of APC included material inaccuracies...
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